7. External audit Flashcards
Roles and responsibilities of the cosec in the external audit process
Give the auditor access to all the requested information and documents, including s.172 evidence.
Offence (fine/imprisonment) if CoSec doesn’t comply, provided with false information or mislead.
What companies are exempt from audit?
Small
Subsidiary
Dormant
They still may choose to have accounts audited
Does audit contain any assessment of the future viability of the company or judgement on future efficiency?
No
Rights of auditors
Auditor has the following rights under the Act s499, 502:
- Right to access to the Co’s books, accounts and records.
- To require explanations from d&o
- Auditor can attend director meetings
- To require from all UK subsidiaries all information
- All notices and other communication re GM
- To attend GM and speak on any business of the meeting
What affects the independence of the auditor?
tba
S.1214
A person may not be appointed as a statutory auditor if he is:
-an officer or employee of the company
-a partner or employee of the auditor
What is the auditor’s main objective?
To obtain reasonable reassurance that the financial statements, prepared by the Co management are free form material misstatement, whether due to fraud or error and to issue a report to the Co members that includes auditors opinion.
What type of individual or firm cannot be appointed as an auditor?
A person cannot be appointed as an auditor if they are an officer/employee of the company or associated undertaking (i.e. subsidiary or parent) , any person or firm that has a business relationship with the company.
What non-audit services auditors are prohibited to providing to PIE?
Tax
Management
Bookkeeping
Payroll
Risk Management
Valuation
Legal
Internal audit
Capital structuring
HR
Underwriting shares
What is the ratio of permitted audit: non-audit service for PIEs?
70/30
Can anyone be appointed as a company auditor?
It must be a registered auditor, not prohibited from being appointed.
Can liability of the auditor be limited?
Yes, but it must be consented by members
How many consecutive years can an auditor be appointed for PIE?
10 years plus 10 years if the tender has been carried out.
Duties of an auditor
Carry out sufficient investigations to form an opinion as to whether:
- adequate accounting records have been maintained
- the accounts are consistent with the accounting records
- rem report is consistent with the accounting records.
What should be stated in the auditors report?
Whether the accounts
1. have been properly prepared in accordance with the financial reporting framework
2. have been prepared in accordance with the requirements of the Act, and where relevant, the IAS regulations, and
3. have given a true and fair view :
in respect of balance sheet
in respect of the profit and loss account
in respect of group accounts of the state of affairs at
the end of financial yea
What should be included in the report to the Audit Co?
- A description of scope and timing of audit
- A description of methodology used
- The quantative level of materiality applied, including
factors - Any significant deficiencies in fin statements
- Any significant matters identified (non-compliance etc)
Describe the appointment process for PIE companies
PIE
A Statutory Audit Directive applies to PIES, statutory auditors and audit firms. The Directive introduced pan-European legislation restricting the length of auditor appointments to PIES for financial years beginning on or after 17 June 2016.
Tender process:
can be carried out either by the directors (if they do not have an Audit Committee)
If carried out by the directors – they decide on how to carry out the tender process
If carried out by the Audit Committee – make their recommendation to the full board of their top two firms for appointment, formally confirm their recommendation is free from 3rd party influence or contractual restriction
Must be extended to at least 2 firms either of which has a reasonable chance of winning
Decision is made by the Board.
If directors disagree with the recommendations made by the audit committee, the Board must provide reasons why.
Rotation
Audit engagement partner and key audit partners – rotated every 7 years for maximum of 20 years – 2yr extension from FRC (I,.e. max 22)
Firm – tendered every 10 years
Non-PIE public
Non PIE
Public - s. 489 CA 2006 provides that Every public company appoints an auditor except dormant companies.
The directors appoint the auditor on the first accounting cycle
After this, the members appoint the auditor at the conclusion of the meeting at which the accounts for the previous financial year are laid before the members.
The appointment of an auditor to a public company does not automatically renew and their appointment ceases at the conclusion of the meeting at which the accounts are laid before the members UNLESS they are reappointed s. 491 (term of office of auditors of public company)
Non-PIE - private
Private – auditors must be appointed in the following instances, unless the Directors have reasonable grounds to believe the company qualifies to be exempt from appointing one.
For the first audited financial year
Before the end of the period allowed for sending the accounts to the members, or
If earlier, the date the accounts were sent to the members
Subsequent years - auditors must be appointed or reappointed within the period of 28 days commencing on the deadline for sending the accounts to members. known as the ‘period for appointing auditors’ s.485 CA2006.
Generally, auditors are appointed initially by the directors and the appointment is confirmed either annually by the members in a general meeting or if there is no objection to the appointment continuing automatically (when there are no general meetings).
Where no auditor has been appointed by the end of the next period allowed for appointing auditors – the auditor in office immediately before that time is deemed to have been reappointed UNLESS:
Their appointment was made by the directors
The Articles require an actual appointment
The reappointment is prevented by members under s. 488
Resolution is lost
Directors have resolved that no auditor to be appointed for the financial year
Removal -PIE
PIE
Resignation – must give notice to the company that must be accompanied with reasons for resignation otherwise the notice will not take effect.
If the resigning auditor makes a statement that is considered to be brought to the attention of the members and creditors – the company may lodge a requisition calling on directors to convene a general meeting to consider the explanation of the circumstances connected to the resignation.
PIEs only - Application to court to remove auditor from office s.511A CA 2006
Removal - Non PIE
Methods of removal:
Ordinary resolution carried - Note that although it is an ordinary resolution – it requires special notice of 28 days
Notice given to Registrar – auditor is removed and replaced
Notice given to members
The auditor retires/ resigns – must give notice with reasons
Auditor is not reappointed at the next AGM (aka retiral)
What does the audit partner rotation guard against
Threat to auditor independence and objectivity
Do all companies need to change their auditors regularly?
No, only the PIEs
When does the auditor of a PIE need to make a statement if they cease to hold office?
Always
Who are the relevant authorities?
FRC and the auditors recognised supervisory bodies
Who is the audit report prepared for?
Members
Is the audit process expected to uncover errors or fraud
No - only material errors and emissions.
